What’s Holding Back A Full Recovery In Oil Demand

By Tsvetana Paraskova

  • Odds of a V-shaped recovery in oil demand are shrinking.
  • Demand for jet fuel will continue to drag on global oil demand for at least another two years.
  • Permanent changes in lifestyle and possible reduced commuting in developed economies could structurally reduce demand for oil products.

Since oil demand started crashing amid lockdowns to contain the coronavirus, analysts have been trying to predict when demand will return to the pre-crisis levels, throwing in V, U, or L shaped forecasts. There is a growing consensus among major international forecasting agencies that a ‘return to normal’ oil demand will take longer than anticipated—probably until 2022. Many analysts believe that a V-shaped recovery for total global oil demand is not in the cards.

While oil demand for road transportation is showing signs of recovery–especially in China, which exited lockdowns first–demand for jet fuel will continue to drag on global oil demand for at least another two years. Permanent changes in lifestyle and possible reduced commuting in developed economies (with work from home now the norm rather than the exception) could also weigh on oil demand. Then there’s the recession with high unemployment rates and reduced manufacturing activity, which could also stall the recovery in oil demand.

According to the International Energy Agency (IEA), oil demand will take over a year and a half to (potentially) return to the levels before the pandemic.

This year, demand is expected to drop by 8.1 million bpd, the biggest-ever decline, the IEA said in its latest Oil Market Report for June.

While the latest estimate is an improvement from the IEA’s forecasts from April (9.3 million bpd drop) and May (8.6 million bpd slump), the first look into 2021 demand is not so encouraging.

Demand is set to recover by 5.7 million bpd next year, according to the IEA. This means that at 97.4 million bpd, global oil demand in 2021 will still be 2.4 million bpd below the 2019 level. Most of the 2.4 million bpd gap in demand between 2019 and 2021 would be due to “the dire situation of the aviation sector,” the IEA said.

Various analysts expect that jet fuel demand will continue to suffer for at least another two years.

The U.S. Energy Information Administration (EIA) is more optimistic than the IEA and expects in its June Short-Term Energy Outlook (STEO) oil demand this year to drop by 8.3 million bpd from 2019, but to rebound by 7.2 million bpd in 2021, leaving just a 1.1-million-bpd gap between the 2019 and 2021 demand levels.

OPEC doesn’t have forecasts for 2021 yet, but it left its full-year 2020 global oil demand projection unchanged at a decline of 9.1 million bpd this week.

“Transportation fuels are forecast to remain under pressure in 2H20, despite ongoing easing in lockdown measures. Aviation fuel is expected to continue facing challenges, as national and international flights are anticipated to only slowly recover, while teleworking/teleconferencing restricting business travel,” OPEC said in its latest Monthly Oil Market Report (MOMR).

Both the IEA and the EIA expect the market to start drawing down record global oil inventories in the second half of the year.

But considering the high inventory levels, with record-high U.S. commercial stocks, oil prices are not set for a major rally in the near term even though the immediate supply-demand balance is widely expected to swing into deficit as early as this month.

“EIA expects high inventory levels and spare crude oil production capacity will limit upward price pressures in the coming months,” the U.S. administration said as it estimates that global oil inventories at the end of May stood 1.4 billion barrels higher than they were at the end of 2019.

According to the Paris-based IEA, “high crude and product stocks will limit the scope for producers in many countries to sell more to refiners.”

The reduction in record-high stocks around the world assumes that global oil demand will continue to recover in the coming months. Still, the oil market continues to face “enormous uncertainties” in both supply and demand, and those uncertainties shouldn’t be underestimated, the IEA said in its report.

Uncertainties about oil demand range from a second wave of COVID-19 infections to fewer people commuting to work either because they work from home or are out of work. Even if gasoline and diesel demand recovers soon, jet fuel demand will still take years to return to pre-crisis levels. The global recession is set to reduce industrial activities and fuel demand from the industry. Oil demand recovering to pre-pandemic levels will likely take more than a year and a half. The recovery will not be V-shaped, but it’s so uncertain and could be so bumpy that no letter in the alphabet can describe it.

By Tsvetana Paraskova for Oilprice.com